The economic illiteracy of Liberty Mutual
Every insurance company has a target demographic. For Geico, it is government employees. For State Farm, it is farmers. For Liberty Mutual, it appears to be people who are economically illiterate. The company recently released a series of nine advertisements, most of which commit economic fallacies. Let us analyze each one and find the fallacies therein.
Makes You Wonder
The narrator says to a video of cars in a junkyard, “No one thinks they are going to be in an accident. Which is why no one wants insurance. So we go cheap. You know, because we’re never gonna need it. Until one day, we do. Now that cut rate policy is costing us big. Makes you wonder if there’s something better out there.”
Perhaps economically illiterate people do not want insurance and think nothing can happen to them, but smarter people understand that there are dangers in life which should be prepared for in advance. This is why insurance exists; to mitigate unpredictable circumstances which are relatively unlikely to happen to a particular person, but are devastating for those who do suffer such misfortune.
New Car Replacement
A man says, “You drop 40 grand on a new set of wheels, then WHAM! A minivan T-bones you. Guess what? Your insurance company will only give you $37,000 to replace it. Depreciation, they claim. ‘How can my car depreciate before its first oil change?,’ you ask. Maybe the better question is, why do you have that insurance company?”
This man fails to understand the subjective theory of value. A car, like anything else, is worth what people are willing to pay for it. People are not willing to pay as much for a used car versus a new car, no matter how little used the car is. There are several reasons for this. Dealerships sell at retail price while used car owners sell at wholesale price, meaning that one would lose money just by buying a car from a dealer and selling it back as soon as one drives it off the lot. Used cars buyers usually cannot afford the price of a new car, and that which cannot be paid will not be paid. Wear and tear begins as soon as the car is used for the first time, meaning that a car’s value begins its descent from new car price to scrap metal price as soon as it is driven for the first time.
Of course, there is nothing inherently wrong with a New Car Replacement policy, but it will cost more, and for good reason. When the potential payout for a claim increases and all else is held constant, the insurance rate must increase in kind so that the insurance company can remain profitable. There is also the matter that an item insured for more than its value is worth more to its owner destroyed than intact, and the incentives involved in such a situation open a new can of worms.
Accident Forgiveness I
A woman says, “You pay your auto insurance premium every month on the dot. You’re like the poster child for paying on time. And then, one day, you tap the bumper of a station wagon. No big deal, until your insurance company jacks up your rates. You freak out. What good is having insurance if you get punished for using it? Hey, insurance companies, news flash. Nobody’s perfect.”
Does this woman want a cookie? Paying bills on time is what a person is supposed to do because that is what a person agreed to do upon signing up with the service provider that is sending the bills. Paying bills on time is also a separate matter from one’s risk profile. Speaking of risk profile, damaging other vehicles makes a driver a greater liability for an insurance company because it makes the insurance company pay claims. As past behavior is a useful predictor of future behavior, an insurance company raises rates on drivers who have had accidents recently in anticipation of having to pay more claims caused by those drivers in the future. Having insurance is still good even if one gets punished for using it because it keeps one from having to pay for all damage one causes while driving out of one’s own savings. It also means that any civil suits will be directed at the insurance company rather than at the driver.
As above, there is nothing inherently wrong with an Accident Forgiveness policy that does not increase rates for the first accident, but it will cost more, and for good reason. The money required to keep the insurance company afloat must come from somewhere, and it can only come from raising rates on accident-free drivers, raising rates on drivers with two or more accidents, lowering claim payouts, or some combination of the aforementioned.
Better Car Replacement
A woman says, “You owned your car for four years. You named it Brad. You loved Brad. And then you totaled him. You two had been through everything together. Two boyfriends, three jobs, you’re like, ‘Nothing can replace Brad.’ Then Liberty Mutual calls, and you break into your happy dance.”
Aside from the silliness of anthropomorphizing one’s car, this is the only passable advertisement of the bunch, as it is the only one that does not contain economic fallacies.
Blindsided
A man says, “You’re driving along having a perfectly nice day when, out of nowhere, a pickup truck slams into your brand new car. One second it wasn’t there and the next second, boom! You had your first accident. Now you have to make your first claim. So you talk to your insurance company and, boom! You’re blindsided for a second time. They won’t give you enough money to replace your brand new car. Don’t those people know you’re already shaken up?”
Only the economically illiterate would be blindsided by the concept of depreciation. This man commits the same fallacies discussed above for the New Car Replacement video combined with a logically irrelevant emotional plea. Being “shaken up” does not affect the monetary value of an insurance claim.
Easy Claim Filing
A man says, “You park your car. As you walk away, crunch! A garbage truck backs into it. So, you call your insurance company, looking for a little support. What you get is a game of a thousand questions. ‘Was it raining? Were your flashers on? Was there a dog with you?’ By the time you hang up, you’re convinced the accident was your fault. Then you remember you weren’t even in the car.”
Like any other business, an insurance company is not in business to lose money. The way that they avoid losing money, aside from keeping insurance costs high enough to make the business profitable, is to avoid paying out claims unnecessarily. To the economically illiterate, what the man describes may sound like a game of a thousand questions designed to attack the insured, but it is necessary to determine who is at fault so that the proper liability in a case may be established.
New Car Totaled
A woman says, “You totaled your brand new car. Nobody’s hurt, but there will still be pain. It comes when your insurance company says they’ll only pay 3/4 of what it takes to replace it. What are you supposed to do, drive 3/4 of a car? Now, if you had Liberty Mutual New Car Replacement, you’d get your whole car back. I guess they don’t want you driving around on three wheels. Smart.”
No, not smart. For the third time, these people fail to understand subjective value and depreciation. One is not supposed to drive 3/4 of a car; one is supposed to either get a different car that costs 3/4 as much, or pay for more out of pocket. An agreement with an insurance company is not meant to coddle drivers, but to pay claims to them according to the terms agreed upon when the insurance policy was purchased.
Accident Forgiveness II
A woman says, “You do all this research on a perfect car. Gas mileage, horsepower, torque ratios. Three spreadsheets later, you finally bring home the one, then smash it into a tree. Your insurance company is all too happy to raise your rates. Maybe you should have done a little more research on them.”
Maybe she should have done more research on how insurance works, as she demonstrates the same sort of ignorance as the woman in Accident Forgiveness I. And perhaps the person being discussed should have done more research on torque ratios, as a better understanding of how power is sent from the engine to the wheels may help one avoid running a car into a tree.
Deductible Fund
A woman says, “You pay your car insurance premium like clockwork. Month after month, year after year. Then one night, you hydroplane into a ditch. Yeah. Surprise! Your insurance company tells you to pay up again. Why pay for insurance if you have to pay even more for using it?”
For the second time, paying bills in a timely manner is not some heroic feat that deserves great praise and adulation upon completion. It is something that a responsible adult just does. This woman then shows the same lack of understanding as the women in the two Accident Forgiveness commercials.
Conclusion
This set of advertisements is appealing to the economic illiteracy and sense of entitlement of the general population, especially younger people. Unfortunately, because economic illiteracy is so widespread, Liberty Mutual might have a winning marketing strategy.
<<Introducing the Ohio Strategy+++++++++++++++++++++++++++++Vester Flanagan Was A Model Social Justice Warrior>>